Texas Instruments Inc. (TXN) — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2019. The interim financial statements are unaudited. Amounts are in U.S. dollars.
Business context and results
TI designs, manufactures and sells semiconductors globally. Its reportable segments are Analog and Embedded Processing; Other includes DLP products, calculators and custom ASIC products. Management prioritizes Analog and Embedded Processing, particularly in industrial and automotive markets. Revenue weakness reflected softer demand across most markets.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $3.771B | $4.261B | $11.033B | $12.067B |
| Gross profit | $2.446B | $2.804B | $7.067B | $7.870B |
| Gross margin | 64.9% | 65.8% | 64.1% | 65.2% |
| Operating profit | $1.589B | $1.937B | $4.474B | $5.197B |
| Operating margin | 42.1% | 45.5% | 40.6% | 43.1% |
| Net income | $1.425B | $1.570B | $3.947B | $4.341B |
| Diluted EPS | $1.49 | $1.58 | $4.12 | $4.32 |
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $4.895B, versus $5.044B a year earlier. Capital expenditures were $684M, versus $808M.
- Trailing-12-month operating cash flow was $7.040B and free cash flow, a non-GAAP measure calculated as operating cash flow less capital expenditures, was $6.033B (40.9% of revenue).
- At September 30, cash and cash equivalents were $3.893B and short-term investments were $1.174B, totaling $5.067B. Total debt was $5.801B; cash and short-term investments were therefore about $734M below debt.
- The $2B revolving credit facility, available through March 2024, was undrawn; there was no commercial paper outstanding. Management said available resources and operating plans were sufficient for at least the next 12 months.
- Nine-month financing cash outflow was $3.441B, including $2.167B in dividends and $2.471B in share repurchases. TI also issued $1.5B of long-term notes and repaid $750M of maturing debt.
Material changes and segment performance
- Q3 revenue declined 11% year over year; nine-month revenue declined 9%. Q3 gross profit fell 13%, and operating profit fell 18%.
- Q3 Analog revenue decreased 8% to $2.674B and operating profit decreased 15% to $1.231B. Embedded Processing revenue fell 19% to $724M and operating profit fell 25% to $233M. Other revenue fell 19% to $373M.
- For the first nine months, Analog revenue declined 5%, Embedded Processing declined 16%, and Other declined 13%. Lower revenue and associated gross profit were the main drivers of lower segment operating profit.
- Q3 operating expenses (R&D and SG&A) were $778M, compared with $786M. Interest and debt expense rose to $43M for Q3 and $125M for nine months, partly reflecting additional debt issuance.
- Cash and short-term investments increased $834M from December 31, 2018. Inventory declined $177M to $2.040B; accounts receivable rose $135M to $1.342B.
Outlook, commentary, risks and unusual items
- Management expected the 2019 annual operating tax rate, excluding discrete items, to be about 16%, compared with 20% in 2018. Actual effective tax rates were 10% for Q3 and 12% for the first nine months, reflecting discrete tax benefits among other factors.
- Management cited weaker markets and emphasized manufacturing efficiency, 300-millimeter Analog capacity, and returning free cash flow to shareholders. TI announced a 17% dividend increase in September. The filing provides no specific revenue or EPS forecast.
- Nine-month restructuring charges/other was a $36M credit, primarily associated with the April sale of the Greenock, Scotland manufacturing facility. Q3 acquisition charges of $79M and nine-month charges of $238M were non-cash amortization of acquisition-related intangibles.
- TI identified risks including semiconductor demand and cyclicality, competition, customer inventory and forecast variability, trade and geopolitical conditions, manufacturing capacity and supply constraints, foreign exchange, cybersecurity, product claims, regulation and tax changes. The filing refers readers to the risk factors in its 2018 Form 10-K.
- Management reported no material product warranty or product liability accruals or payments and did not expect pending legal and administrative proceedings to have a material adverse effect. Disclosure controls were concluded effective.
Important facts for investors to verify
- Whether semiconductor demand stabilizes and whether Analog and Embedded Processing revenue declines moderate, particularly in industrial and automotive markets.
- Whether margins and factory utilization hold up as revenue changes, given the fixed-cost nature of manufacturing.
- Cash generation, capital spending and shareholder distributions, including the sustainability of the increased dividend and ongoing repurchases.
- Debt maturities, interest expense and liquidity; also monitor the stated risks around trade, customer inventory, manufacturing capacity and supply.
- The impact of discrete tax items on reported effective tax rates versus management’s approximately 16% annual operating tax-rate expectation.